Wednesday, May 18, 2016

The U.S Nonfarm Payroll Report. What? Why? How?

The U.S Nonfarm payroll Report is put together and released on the first Friday of each month by the Bureau of Labour Statistics and it offers a complete illustration of the country’s economic state. The numbers released in the report include the unemployment rate, job growth, average hourly earnings and the manufacturing subcomponent of the report which shows specific growth or contradiction in the manufacturing sector every month. Excluded from the report are all general government and household employees, as well as non-profit organization and farm employees.

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What makes this report so interesting to anyone involved in the world of finance and economy is the fact the nonfarm payroll report helps determine the current state of the economy and predict future levels of economic activity because of the affect it has on all markets, the job market impacts the FX (foreign exchange), bonds, stocks and derivatives markets. It is the most factual collection of data for all market trends and market growth.

In more basic terms if the nonfarm payroll report shows an increase in jobs that means that the economy is doing well. An increase in employment means that companies are growing and a secondary benefit is that the newly hired workers will have more money to spend on goods and service. Whilst a decrease means that the opposite is true, the NFP and the overall job market have become key indicators for traders and that is reflected in the market’s sensitivity to the report.

The latest nonfarm payroll report is of great importance because of how the Greek headlines had affected the market volatility the previous month, and were verified when the numbers contradicted the expectations hesitantly. In June the US economy was expected to add 231,000 new jobs but the report showed that 223, 000 new jobs were added. Even though the numbers were not so far apart from the estimate it showed that the economy was not growing in the rate it was expected to which also resulted in traders favouring a more highly pliable currency and therefore dropping the U.S currency rate even further.  However the unemployment rate was expected to go back to 5.4% after a slight raise in May but fell to a surprising 5.3% in June. The uncertainty of the situation in Greece meant that the US dollar had gained a slight boost but again as soon as the matter was somewhat resolved the dollar rate took a slight step back once again.

The reason for this love – hate relationship between Forex and the nonfarm payroll report comes down to the difference between the nonfarm data and the expected figures and how they affect the market overall. If the nonfarm payroll comes out more prosperous it will indicate a positive market growth which will lead to more investment opportunities and a more stable currency growth, but the same works vice versa. However, if increases in the nonfarm payroll occur at a fast rate, this may lead to an increase in inflation that could ultimately result in a decrease of good and services acquisition. In the forex world if the actual data comes in lower than economists’ estimates, forex traders will U.S dollars in anticipation of a weakening currency. The opposite is true when the data is higher than the economist’s expectations. 

As soon as the nonfarm payroll comes out it has the power to drastically shift the market, which is what makes it the most highly anticipated news market announcement in finance. Keeping track of past NFP data and most recent market movements is crucial, however these can only serve as forecast and strategy preparation tools. If the numbers of the NFP are revealed to have wide margins below the trader’s and economist’s estimations it will lead to hazardous volatility in the market where market prices have been witnessed to drop up to 100 pips instantly.

Being able to understand and estimate the data of the next nonfarm payroll report is great asset to any trader’s strategy arsenal as it expands market knowledge and awareness to a completely different level. Which is why HiWayFX has devised a monthly competition where HiWayFX traders can predict the nonfarm payroll figure and win $500 on their trading account. For more information check HiWayFX’s Facebook page on terms and conditions of the contest.



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